Cross-profit analysis is a great tool for any business. It helps you understand how profitable each of your products or services is, and which areas of your business need more attention. If you’re wondering how to find cross-profit in your business, that means you already recognize the benefits it can bring to your company.
Cross-profit analysis is one of the most useful techniques that an organization can apply to identify the profitability of individual products or services offered by the organization. It helps determine whether it is possible to sell one product or service at a profit while losing money on another one. Here is what you need to know to use cross-profit analysis to make your business more successful.
What is Cross-Profit?
When your business acquires customers, selling multiple products or services increases your earnings per customer. This is why techniques like up-selling are important. Cross-profit is the profit earned from successfully selling additional products and services to customers.
For example, a customer that wants to buy a guitar will also want to buy an amp and audio cables. A music store can sell the guitar and make a profit, but cross-selling the amp and cables with the guitar means even more profit. In this case, cross-profit is the money earned from selling the amp and cables to the customer that only came into the store looking for a new guitar.
Why is Cross-Profit Analysis Important?
Cross-profit analysis allows you to understand how your products and services contribute to your company’s revenue and bottom line, as well as to see trends in what products sell together. It helps you identify which products or services are the most profitable, so you can focus on those.
It can also help you identify the products or services that do not sell well on their own so that you can make adjustments or find better product options.
Companies thrive on their ability to complete sales and generate profit. Cross-profit analysis tells you where you are making your money from and can help you prioritize your products. In many cases, companies thrive because of cross-profit options. They have perfected a set of products that they can pair together to increase the amount earned per sale. That way, the company doesn’t have to spend as much to acquire individual customers. Instead, it can maximize the amount it can make for each new customer.
Finding Cross-Profit in Your Business
If your company already sells multiple products or services, then there is a chance that cross-profit already exists in your business. You just have to know how to find it. Here are the steps to follow so that you can identify the cross-profit options in your business.
Find Correlations Between Item Sales
The first step in identifying your cross-profit is to find correlations between sales, specifically, products or services that sell together or are sold to the same customer. In many cases, cross-profit is earned during the initial sale because the customer buys multiple items that fit together at the same time. In other cases, a customer may return for a second purchase to acquire more products or services that complement what they already bought.
Go through your sales and look at what is being purchased at the same time. This is the easier form of cross-profit to find. However, if your business has a way of tracking customer purchases through individual accounts, payment methods, or other options, you can try to correlate purchases to the same person, even if they happen on different days.
Figure Out Why Customers Buy Them
When you find these purchases, take note of what is being purchased. Examine the products or services to determine if they fit well together. It may not be immediately obvious in some cases, but there is usually a correlation between them that drives the customer to buy them.
It may be that those products or services need each other to function. The reason is often obvious, such as
- A customer that buys their first electric guitar needs an amp and cables to go with it
- A customer buying their first house needs furniture to make it comfortable
- A customer buying their first camping trailer needs a car that can tow it
Find the Reason for Subsequent Purchases
The reason for a combined or subsequent purchase may be less obvious, such as:
- A driver that replaces four tires on their car may have had a flat tire in one, but the other three were old
- A cat owner buys a cat bed, then comes back to buy two more might have found that the cat really likes the bed or they got more cats
- A homeowner buys interior paint in one color, then comes back to buy paint in a different color a week later may be painting separate rooms, or hates the first color
If you can uncover the reasons behind each purchase, then you can likely figure out how the customer thinks. More importantly, you may discover that there is something that your customer needs and use that to your advantage to improve the customer experience.
Identify the Primary Purchase
When products or services is purchased together, there is often one primary purchase and one or more accessory purchases. The customer comes in looking for one thing that they need, finds it, then finds several things that they need or want to go with it.
For example, buying a printer means you also need to buy paper and ink to use it. So, a customer will likely buy all three at the same time even though they just came for the printer.
You want to identify what the primary purchase is so that you can see what the accessory purchases are. This factors into how you calculate cross-profit.
Measure the Profit from Accessory Purchases
Once you know which purchases are primary and which are accessory purchases, calculate the profit from the accessory purchases.
In a loose sense, you can calculate this by knowing the profit margin on each item that you sell. Many businesses already calculate this when setting prices. Just find the profit margin for each item and add them up to get your cross-profit for that sale. Do this for all of the accessory purchases across the business, and you can calculate your overall cross-profit.
In a strict sense, you can calculate cross-profit a bit differently, which will give you a more accurate number and deeper insight into your business.
How to Measure Cross-Profit
Start by finding the price that you sold your accessory items for. Then, find the cost of acquiring customers for primary purchase. Use these two numbers to calculate the profit margin for the accessory items. Essentially, you’ll use this equation to find the profit margin:
Profit Margin of Accessory Item = $ of Item Sold – $ of customer acquisition for primary purchase.
For example, if it costs $10 to acquire a customer for a printer through advertising and associated costs, and they buy a printer with $40 of paper and $20 of ink, then you can calculate the profit margin of each item with:
PM of Paper = $40 – $10
PM of Ink = $20 – $10
Cross-Profit of Sale = $30 + $10 = $40
The reason this works is because you had to spend money to acquire a customer for the primary purchase. Without that primary purchase, the other purchases do not happen. So, it costs what you paid to get a customer for the primary purchase item, not the accessory item. In short, you have to base your profit margin on what it costs to get the customer in the door to buy the primary item since that is what they came to buy.
The results you get from using this type of calculation are more accurate than using the standard profit margin that you calculate per item because those profit margins are likely based on what it costs to get customers for those items alone.
Using Cross-Profit to Your Advantage
Calculating cross-profit may look complicated, but it is an important metric to calculate. If used correctly, you can significantly improve your overall revenue.
One of the best ways to do this is to bundle products that are frequently bought together. If you bundle them, it is easier for the customer to get everything that they need in one purchase.
Aside from creating a better customer experience, it also makes it easier to convey value in your offers. When a customer sees a bundle, they think that they are getting a better deal since everything is rolled together. In their minds, the bundle is more valuable than the individual parts.
Use Cross-Profits to Fix Other Parts of Your Business
When you make cross-profits an important part of your business, you can increase your overall revenue. Use that extra capital to fix other parts of your business. For example, you could hire a third-party answering service to help you improve your customer service.
If you’re ready to get started with a professional answering service, we’re here to help. Contact Answer Aide by calling (866) 427-3500 or by filling out our online form. We’re happy to partner with you to support your business while it grows.